With energy prices continuing to fluctuate, choosing the right energy contract has never been more important for UK businesses. Energy costs comprise a significant portion of operating expenses, and the type of contract you choose can substantially impact businesses. Energy costs comprise a significant portion of operating expenses, and the type of contract you select can substantially impact your bottom line.
In this post, we’ll break down the differences between the two main contract types—fixed and flexible—explore their pros and cons, and help you decide which option best aligns with your business goals.
Understanding Fixed Energy Contracts
A fixed energy contract locks in your energy commodity, and third-party charges are charged at a single fixed rate for a set period, typically one to five years. The price per unit of energy (kWh) remains constant throughout the contract term, regardless of market fluctuations.
Benefits of Fixed Energy Contracts
Price Stability: Fixed rates protect your business from energy price increases, allowing for predictable budgeting and long-term financial planning.
Simplicity: These contracts are straightforward and ideal for companies that prefer a hands-off approach to energy management—no need to monitor market trends.
Reduced Risk: You’re shielded from market volatility, which is especially valuable during rising energy prices.
Drawbacks of Fixed Energy Contracts
No Benefit from Price Drops: If market prices fall, you won’t benefit from the lower rates.
Potential Overpayment: Fixed rates often include a risk premium added by suppliers, resulting in higher overall prices than flexible contracts.
Take or Pay penalties: Customers may be penalised in case they over or under-consume by 20% of the contracted volume
Understanding Flexible Energy Contracts
A flexible energy contract allows businesses to purchase energy in smaller chunks (tranches), often based on real-time market conditions. While prices can fluctuate, this approach offers both opportunities and risks.
Benefits of Flexible Energy Contracts
Potential Cost Savings: Businesses can capitalise on market dips, buying energy at multiple purchasing points when prices are favourable and potentially saving money.
Market Responsiveness: Flexible contracts allow for more control over procurement strategies. You can adjust purchases based on usage trends and market forecasts.
Optimised Cash Flow: Rather than locking in all energy at once, you can spread out purchases
Access to day-ahead price: Businesses with dedicated energy managers or access to market intelligence may make the most of flexible contracts. Those without in-house expertise prefer a fixed option’s simplicity and reduced oversight.
Drawbacks of Flexible Energy Contracts
Access to competitive day-ahead prices
Price Volatility Risk: If market prices surge and you are unhedged, your business could face higher costs than if you’d secured a fixed rate.
More Complex to Manage: Flexible contracts require regular market monitoring and energy procurement expertise—this can be time-consuming and resource-intensive unless you have a proactive, hands-on Energy consultant.
Budgeting Uncertainty: Fluctuating prices make it harder to forecast energy spend.
Which Contract Is Right for Your Business?
The best energy contract depends on your business’s size, energy usage, and risk appetite. Consider the following factors when making a decision:
1. Business Size and Energy Consumption
- Smaller businesses with steady usage prefer the simplicity of fixed contracts.
- Larger organisations with high energy demand might benefit from the savings potential of a flexible strategy.
2. Budgeting and Financial Planning
- If price stability is key for budgeting, fixed contracts offer peace of mind.
- Flexible contracts unlock cost savings if your business has financial flexibility and can tolerate some risk.
3. Access to Market Expertise
- Businesses with access to market intelligence and with a sound purchasing strategy often make the most of flexible contracts.
- Those without expertise prefer a fixed option’s simplicity and reduced oversight.
Hybrid Approach: The Best of Both Worlds?
Some businesses choose a hybrid energy strategy, combining fixed and flexible contract elements.
For example, you could:
- Secure a portion of your energy at a fixed rate for budget certainty
- Leave the rest open to market fluctuations to benefit from dips
This approach helps balance cost control with potential savings and can be tailored to your business’s unique needs.
How CES Can Help
At CES, we understand that choosing the right energy contract isn’t a one-size-fits-all decision. That’s why we offer tailored energy procurement services to guide you every step of the way.
Our energy experts will:
- Analyse your energy usage patterns
- Monitor real-time market trends
- Develop a bespoke procurement strategy
- Help you decide between fixed, flexible, or hybrid solutions
Whether you want budget certainty, cost savings, or a balance of both, CES can help you with the best energy procurement strategy.
Ready to take control of your energy costs?
Contact us by email at [email protected] or call us on 0203 157 1020 today to learn how we can build a strategy that works for your business.
